You may have seen the report for Pew Research Center with the discouraging headline: For most Americans, real wages have barely budget for decades.
On the face of it, these should be heady times for American workers. U.S. unemployment is as low as it’s been in nearly two decades (3.9% as of July) and the nation’s private-sector employers have been adding jobs for 101 straight months – 19.5 million since the Great Recession-related cuts finally abated in early 2010, and 1.5 million just since the beginning of the year.
But despite the strong labor market, wage growth has lagged economists’ expectations. In fact, despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers.
Not good. Fortunately, it’s also not complete. And when you fill in the gaps, the picture is considerably more positive.
In a Bloomberg column, Ramesh Ponnuru breaks it down. The column is short (aren’t they all these days?) and clearly explains why the Pew assessment is overly bleak.
He identifies two basic problems:
1) Compensation consists of wages and benefits, with benefits having grown more rapidly than wages in recent years,
2) Pew uses a flawed measure of inflation.
We’ll quote the column briefly.
With respect to benefits:
The first reason this news should be less disturbing than it appears is that compensation includes benefits, not just wages, and the proportion of benefits to wages has been rising. Average compensation must therefore have risen faster than average wages have.
Drew DeSilver’s write-up of the findings for Pew mentions this issue prominently, and links to a Bureau of Labor Statistics compendium that shows how much difference non-wage compensation can make. From 2001 through 2018, the average civilian wage grew 5.3 percent; average compensation grew 10.4 percent, almost twice as much.
And regarding inflation:
Pew appears to be using a measure of inflation called CPI-U, which is produced by the Bureau of Labor Statistics and used by many other researchers. But as Scott Winship, then an analyst at the Manhattan Institute, detailed a few years ago, that measure overestimates inflation — and vastly overestimates its cumulative impact over time…
The government produces a statistic that does not have these flaws and goes back to 1929: the PCE deflator. Use that better measure of inflation, and the flat trend line in wages since 1978 that Pew found becomes a 22 percent increase. Real compensation, including benefits, must have grown even more. (For those readers wondering whether that apparent progress just reflects growth at the top of the income distribution, Winship has calculated that workers in the middle of the distribution saw a 31 percent increase in compensation from 1967 to 2015.)
DeSilver’s article for Pew acknowledges some of the challenges, as Ponnuru writes. Here’s DeSilver’s conclusion.
Wage stagnation has been a subject of much economic analysis and commentary, though perhaps predictably there’s little agreement about what’s causing it (or, indeed, whether the BLS data adequately capturewhat’s going on). One theory is that rising benefit costs – particularly employer-provided health insurance – may be constraining employers’ ability or willingness to raise cash wages. According to BLS-generated compensation cost indices, total benefit costs for all civilian workers have risen an inflation-adjusted 22.5% since 2001 (when the data series began), versus 5.3% for wage and salary costs.
Other factors that have been suggested include the continuing decline of labor unions; lagging educational attainment relative to other countries; noncompete clauses and other restrictions on job-switching; a large pool of potential workers who are outside the formally defined labor force, neither employed nor seeking work; and broad employment declines in manufacturing and production sectors and a consequent shift toward job growth in low-wage industries.
While those factors may certainly have some validity, there are two very good reasons for believing the situation is not as bad as the headline contends.